In the aftermath of last weekend's local elections in Turkey, which saw Erdogan's ruling AKP party lose control of Turkey's two main cities, Ankara and Istanbul, on Monday President Erdogan demanded that the country’s election board investigate "widespread irregularities" in local elections in Istanbul, where a partial recount is already underway after the ruling party contested its defeat, sending the lira tumbling to the lowest level since March 25.

"There is stealing from the boxes," Erdogan said, adding that “we’re applying to the YSK against that organized intervention at the ballot box,” referring to the High Election Board. In the U.S. "they renew elections when there is a one percentage point difference," the president said in what appeared to signal a push for a new election in the city.

"Given the huge economic challenges facing Turkey, this is the last thing Turkey needs at this stage,” said Tim Ash, senior strategist at BlueBay Asset Management LLP in London, said by email.

As we reported at the time, the March 31 municipal vote ended a quarter century of rule by Erdogan’s movement in Ankara, the capital. But it was the defeat in Istanbul that has galvanized his ruling AK Party into refuting the preliminary results. As a reminder, the AK Party and its predecessors have been holding Istanbul since Erdogan won the mayor’s office in 1994, and a defeat there would hinder social policies that rally the support of poorer citizens.

“No one has the right to claim victory in Istanbul with just a 13,000 to 14,000 vote difference,” Erdogan said, referring to the gap between the candidate of the opposition CHP, who was initially declared winner, and the AKP’s pick for mayor.

Erdogan’s party has already sought the cancellation of voting in Istanbul’s Buyukcekmece district and applied to the election board for a recount of all votes in the remaining 38 districts across the country’s largest city of 16 million people.

The news that Erdogan would challenge the Istanbul vote, adding to the country's political instability, sent the lira sliding, with negative FX sentiment boosted when the Turkish central bank cut the interest rates it offers on lira leg of FX swaps with commercial lenders to 24% from 25.5%; in doing so it revered an increase in rate to 25.5% from 24% on March 25, when it ceased to offer any funding to commercial banks through its one- week repo facility

In addition to the slide in the lira, Turkish bonds and stocks also fell on Monday: yields on 10-year local-currency bonds jumped 21 basis points to 17.49%, the highest in a week, while five-year CDS climbed above 400 bps. In equities, the Borsa Istanbul benchmark stock index dropped 1.8% the first retreat in four days, after gaining 5.3% last week.